Splitting common stock between founders and investors - How can a founder ensure that he does not lose control of his company?
View: It seems to me that the only sure way for the founder of a company to ensure, with absolute certainty, that he will not lose control of his company is for him to retain 50.1% of his company's shares.
This setup seems problematic, and damages the amount of investment that a founder can secure.
Question: How can a founder retain control of his company without hoarding 51% of the company's shares?
More Thoughts: When the founder is making decision for the company, he is sure, at some point, to find his vision of the correct path for a company to be different from what his investors may think. It seems to me that the founder is then forced to either choose what he believes is best for the company, or choose to appease the board in order to keep from being "thrown out."
2 Answers
There are basically two paths:
- you own the company, it's yours. It probably won't grow like Facebook, you won't take outside investment, but you can still build quite an empire that way.
- you want to grow fast and go for siginificant outside funding. Then yes, you are not guaranteed to always be the boss: if you mess up, you'll be fired. The way to not be fired is do a good job, be the best at running the company. Considering you are the founder and you have the most relevant experience, you need to mess up big time before investors will want to replace you (*). For Delaware corporations, the board of directors is actually your boss, not the shareholders. There are tricks you (or your investors) can play to guarantee certain seats for preferred classes of investors. If you are Facebook or Google, you can get away with it. Everyone else, just do a good job.
(*) with some caveats, some investors are in love with the romantic notion of a "professional CEO".
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This is obviously an answer of in-depth experience, maybe even person experience. Thank you. – Jonathan Todd 10 years ago
You can sell more than 50% of your company but still control more than 50%. You should talk to a lawyer about the possible approaches and best approach. Some options:
- You can have a shareholder sign an agreement that gives you control of their votes as part of allowing them to purchase shares. So, while you don't own the shares or votes, you control the votes by contract.
- You can give disproportionate voting rights to your shares. You can have one group of shares that has 10 votes per share, and you can have another group of shares that get 1 vote per share, or some other arrangement.
In either of those scenarios, you can own less than 50% of the outstanding shares but control more than 50% of the voting rights.
See Facebook example.1
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Ok, in my recent studies I did notice that a company could define separate share types and even sell non voting shares. Something that came to mind there, though, was the idea that maybe giving investors less votes per share would actually damage the value of those shares. How will altering the voting power on shares affect the value of them to big investors? Will they still see the same monetary value in that sort of setup? – Jonathan Todd 10 years ago
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Whether an investor values the shares differently will depend on the investor and how they value control, but the economic value should be the same. No matter who votes, you participate in a liquidity event (though, you can also adjust the terms of that). – Jaredcohe 10 years ago
